Dow 15000: What It Means, What It Doesn’t Mean

The biggest commentary about the meaning of Dow 15000 is how little commentary it’s actually generating. Usually, around a notable market event like Dow 15000, the punditry is falling over itself trying to be heard. Instead, all we are hearing over here at MoneyBeat is crickets.

Bloomberg

Some of this is record-fatigue. We went through a huge parade earlier this year when the indexes topped their 2007 highs. If the Dow Jones Industrial Average closes above 15000 on Tuesday, as seems pretty likely today, it merely reinforces an existing trend.

The move higher does, however, put the index near the “upper band” of its Bollinger Band, a technical tool developed by John Bollinger in the ’80s that measures deviations in the index. It basically measures how far off an index is from its long-term trend. When it reaches the upper or lower band, it tends to snap back to somewhere in the middle before too long.

The index was near its upper Bollinger Band in October 2007, and fell through its lower Bollinger Band in March 2009, for what it’s worth.

Psycholocially:The effect of something like Dow 15000 usually is more psychological. Big, round numbers always attract interest. The difference is that during the past few decades, it was an article of faith that the market represented the economy, or even that the market was the economy. The aftermath of the Crash of 2008 has severely disabused most everybody of that notion, one reason why interest in the market, and trading volumes, remain so lackluster even as the indexes hit fresh records.

It’s hard for most people to get excited about new highs in the stock market when they’re still trying to rebuild the wealth they lost from the 2000 and 2007 stock crashes, and the housing bust. Corporate profits may have resumed their long-term trend, too, and are hitting fresh record highs, but those corporate profits aren’t translating into broad wage gains (the latter being, to our minds, the best indicator right now of the nation’s health).

Valuation: We’ve become so bubble battered over the past 13 years, that it’s natural to think any rising asset must be in a bubble, but it’s relatively easy to make a case that stocks are fairly valued. The simple forward-year PE ratio on the S&P 500 is a hair under 15, roughly in line with the long-term average. Of course, if stocks continue at this pace, and earnings continue at their pace, that number will get richer.

The point isn’t whether or not you necessarily think the market’s fairly valued. The point is that even at these record highs, the market doesn’t seem grossly overvalued. These aren’t bubble days, and when you consider the world of risky assets, U.S. stocks seem like a good compromise between risk and safety.

The Fed: It’s no secret the Fed has made reflation one of its big goals. Hindsight being what it is, it’s easy to see now that the Fed was pushing this in March 2009; indeed, it’s hardly coincidence that the post-crash low aligns so closely with the announcement of the Fed’s first big bond-buying program, the so-called quantitative easing.

It’s impossible to say at this juncture just how much of the gains the Fed represents. Whatever the number, though, the market has developed a Fed fetish, convinced that the central banks will step in to stanch any selloff. Indeed, Ed Yardeni’s Monday note listed several reasons to be bullish, and these were the first three: the Fed, the ECB, the Bank of Japan. His fourth reason was near-zero interest rates.

Don’t Forget:Lastly, consider that this peak represents — ready for this? — a 6% gain from the previous peak, in 2007. So, assuming you bravely stuck it out and didn’t sell during the long slide from October 2007 to March 2009, you’re up 6% in six years. We didn’t get our doctorates in math, or anything else for that matter, but even we can see that’s not exactly a blistering rate of return.

But what about the market timers who made out big? Somewhere, we’re sure, there’s somebody who sold in October 2007, and bought in March 2009, and made a fortune. They’re out there. Probably riding a unicorn. Through a field of athelas and elanor flowers. Protected by the Sun God.

For most mere mortals, though, the stock market has been far less benevolent, even with this year’s record run.